Metalsa India Pvt. Ltd., New Delhi V. DCIT, circle-16(2), New Delhi

ITA 7780/DEL/2019

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 9455 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: I
• Next Hearing Date: 08-09-2022
• Assessment Year: 2013-2014
• Appeal Filed On: 23-09-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MAHESH SHAH
• Assessee Lawyers: PALLAVI DINODIA
• Keywords: Transfer pricing; International transaction; Tangible material; Commercial expediency
• Section: 271(1)(c); 92C; 92CA

Judgement Text

I.T.A. No. 7780/Del/2019 1 IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH “I” NEW DELHI ] BEFORE SHRI G. S. PANNU, PRESIDENT A N D SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER आ.अ.सं./I.T.A No.7780/Del/2019 िनधाᭅरणवषᭅ/Assessment Year: 2013-14 M/s. Metalsa India Pvt. Ltd., 14 th Floor, Dr. Gopaldas Bhawan 28 – Barakhamba Road, New Delhi – 110 001. बना म Vs. DCIT, Circle : 16 (2), New Delhi. PAN : AAFCM3091H अपीलाथᱮ / Appellant ᮧ᭜यथᱮ/ Respondent िनधाᭅᳯरतीकᳱओरसे /Assessee by : Ms. Pallavi Dinodia, C. A.; राज᭭वकᳱओरसे / Department by : Shri Mahesh Shah, [CIT] - D.R.; सुनवाईकᳱतारीख/ Date of hearing : 09/09/2022 उद्घोषणाकीतारीख/Pronouncement on : 31/10/2022 आदेश /O R D E R PER C. N. PRASAD, J.M. : 1. This appeal is filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-44 (hereinafter referred to I.T.A. No. 7780/Del/2019 2 CIT (Appeals) New Delhi, dated 25.07.2019 for the assessment year 2013-14. 2. The assessee in its appeal has raised the following substantive grounds :- “1. The Ld. Commissioner of Income-tax(Appeal) [‘CIT(A)’] has erred in law and on facts, in confirming a Transfer Pricing (‘TP’) adjustment of ?2,60,41,252/- made by the Ld. Transfer Pricing Officer (‘TPO’) / Ld. Assessing Officer (‘AO’) on account of Arm’s Length Price u/s 92CA of the Income Tax Act, 1961 (‘the Act’), wholly on illegal, erroneous and untenable grounds. 2. The order passed by the Ld. CIT(A) is bad in law and on the facts and under the circumstances of the case, on account of Arm’s Length Price u/s 92CA. TRANSFER PRICING GROUNDS - INTRA GROUP SERVICES GIGS’! 3. That the Ld. AO’s order based on the findings of the Ld. TPO and the order of the Ld. CIT(A) are erroneous and untenable in law and on the facts for various reasons and not limited to the following :- 3.1. The Ld. TPO and consequently the Ld. CIT(A) have grossly erred in law and on facts, in rejecting “Any Other Method”, applied by the appellant to benchmark the international transaction of receipt of Intra Group Services in nature of managerial support services from its associated enterprise (‘AE’), without giving cogent reasons. 3.2. The Ld. TPO and consequently the Ld. CIT(A) have grossly erred in law and on facts of the appellant’s case in holding that: (i) Services received are of duplicate nature based on erroneous factual findings; (ii) Nature of services actually rendered is not specified in the documentary evidences provided by the appellant; I.T.A. No. 7780/Del/2019 3 (iii) The emails furnished do not support appellant’s contention of actual receipt of services; and (iv) The payment for the services was aimed at profit shifting. 3.3. The Ld. TPO and consequently the Ld. CIT(A) have grossly erred in exceeding his jurisdiction, by determining the ALP of Intra Group Services at NIL as against ?2,60,41,252/-, by applying the Benefit Test, which is outside the purview of the methods, prescribed u/s 92C of the Act. 3.4 The Ld. TPO and consequently the Ld. CIT(A) have grossly erred in law and facts in determining the ALP of the payment of Intra Group Services at Nil, by alleging no economic benefit to appellant and thus judging commercial expediency of the said transaction, which was outside his jurisdiction. 3.5 The Ld. TPO and consequently the Ld. CIT(A) have grossly erred in applying the CUP method to determine the ALP of the Intra Group Services as Nil, without giving comparable uncontrolled transactions of identical services as required under Rule 10B(l)(a) of the Income Tax Rules, 1962. 3.6 The Ld. TPO and consequently the Ld. CIT(A) have failed to appreciate that the intra group services have been charged by the holding AE company to its group companies on cost allocation basis without adding any mark-up. Therefore, no adjustment could have been made on account of common services rendered by group company for and on account of group subsidiary companies. 3.7 The Ld. TPO and consequently the Ld. CIT(A) have grossly erred in not considering the OECD Guidelines relating to determination of arm’s length price for low value added intra group services. 4. That the Ld. A.O has erred in law in initiating penalty proceedings u/s 271(l)(c) for alleged concealment of income. 5. That each ground of appeal is independent and without prejudice to other grounds of appeal raised herein.” I.T.A. No. 7780/Del/2019 4 3. The ld. Counsel for the assessee, at the outset, submits that the issue in ground No. 3 of grounds of appeal is decided by the Tribunal in assessee’s own case for the assessment year 2012-13 in ITA. No. 449/Del/2019 for the immediately preceding assessment year i.e. 2012-13 by order dated 7.12.2021 in its favour. The ld. Counsel further submits that the ld. CIT (Appeals) confirmed the stand of the TPO in determining the ALP to intra group services at NIL by following his predecessor’s order observing that the material facts of the case of the assessee in the assessment year 2012-13 are the same in the year under reference and following the order of the Ld. CIT (Appeals) for assessment year 2012-13 the contention of the assessee that ALP is at Rs.2,60,41,252/- is not accepted. 4. The ld. DR supported the orders of the authorities below. 5. On hearing both the sides and perusing the order of the Tribunal, we find that the only issue under dispute pertains to determination of ALP with respect to International transactions in respect of payment of management fees amounting to Rs.2,60,41,252/- by the assessee to its AE, for availing the intra group services (IGS) and the Tribunal in assessee’s case for the immediately preceding assessment year i.e., 2012-13 in ITA. No. 449/Del/2019 dated 7.12.2021 decided the issue by dis-approving the action of the ld. CIT (Appeals) in treating the management services provided by the AE to the assessee as duplicate service and consequent determining its ALP at NIL. The Tribunal while holding so observed as under:- I.T.A. No. 7780/Del/2019 5 “20. We have heard both the parties and perused submissions advanced by both the sides in light of records placed before us. 21. Ground no. 1 and 2 are general in nature and required no adjudication. Ground no. 3 pertains to determination of ALP with respect to international transaction related to Payment of Management Fee to AE, wherein the ld. AR has raised various sub-grounds which are adjudicated as follows: 22. The appellant is engaged in the manufacturing and selling of side rails for heavy commercial vehicles. It also provides services in relation to manufacture of side rails for heavy commercial vehicles. The appellant has made payment of management fees amounting to Rs. 69,65,962/- to its AE, namely, Metalsa S.A. de C.V. (‘Metalsa Mexico’), for availing the IGS. Under IGS, the appellant received management support from its AE in respect of Human resource services, IT services, legal and compliance, operating coordination and strategy implementation, financial accounting and advisory, research, tax services and marketing and communication services. The AE provides the above services to the appellant and other group entities as well. The AE only charged actual cost without adding any markup. With respect to the said transaction, the appellant has applied ‘other method’ as MAM. 23. The TPO and consequently the CIT(A) have been of the view that the captioned services received by the appellant are ‘duplicate’ in nature being various other expenses have been separately paid by the appellant to AE and therefore the said services are duplicate in nature, which is evident from the following observations made by the CIT(A) in its order, which are as follows: “9.13 The TPO in his Remand Report dated 13.09.2018 had categorically stated that the management services received by the appellant were duplicate services in view of the fact that compensation charges, miscellaneous charges and legal and professional expenses had been paid I.T.A. No. 7780/Del/2019 6 separately by the appellant to the AE. The appellant in its rejoinder dated 10.10.2018 has not challenged the contention of the appellant that the payments for management services were duplicate in nature. In view of the same, the contention of the appellant is not accepted. The ground of appeal is dismissed.” “9.14 Ground No. 6 pertains to the contention of the appellant that AO/TPO has erred in not considering the recent OECD guidelines relating to determination of of arm’s length price for low value added intra group services. The AO/TPO has made the addition on account of the fact that the management services received by the appellant are duplicate Services in view of the fact that compensation charges, miscellaneous charges and legal and professional expenses had been paid separately by the appellant to the AE. The documents filed by the appellant also do not support the contention of the appellant. The ground of appeal is dismissed.” In this regard, the ld. AR has provided detailed nature wise breakup of the said expenses which were paid to third parties clearly demonstrated that these ‘other expenses’were incurred for distinct purposes and are related to different services availed from third parties and not from the AE.The details of such expenses are reproduced hereunder for the sake of ready reference. “Table 2: Details of Compensation charges Particulars Amount (INR) Nature of Services BMF TOTAL SOLUTIONS 67,70,500 Compensation charges (Provision made for dispute settlement with material supplier – paid in April 2012) I.T.A. No. 7780/Del/2019 7 Table 3: Details of Miscellaneous Charges Particulars Amount (INR) Nature of Services BLUE DART EXPRESS LIMITED 40,457 Courier Services Bureau Veritas India Private Limited 45,000 Quality Audit DHEERAJ SAXENA 11,374 Miscellaneous expenses HINDUSTAN PRINTING 49,400 Printing of documents & reports INCOME TAX DEPARTMENT (EXPATRIATE TAX) 17,14,383 Income Tax JAGDAMBA COMMERCIAL PRIVATE LIMITED 22,200 Medical Test of Employees JYOTI KUMAR OJHA 10,294 Miscellaneous expenses KALZEM INTERNATIONAL 22,624 Purchase of Safety Items KESHRI PRINTING 17,882 Printing of documents & reports M/S M.S.ENTERPRISES 1,850 Miscellaneous work Material Issued for Misc expenses 5,50,079 Material Issued NAGESH DHAMGUNDE 3,000 Miscellaneous expenses I.T.A. No. 7780/Del/2019 8 PANKAJ KUMAR SINGH 3,955 Miscellaneous expenses PRAGATEE ENTERPRISES 2,39,591 Purchase of Housekeeping Materials SANDEEP DAS 990 Miscellaneous expenses SENGEL SINGH SAREN 78,249 Miscellaneous expenses VED PRAKASH 1,506 Miscellaneous expenses TOTAL 28,12,834 Table 4: Details of Legal and Professional Expenses Particulars Amount (INR) Nature of Services TQM INTERNATIONAL PVT. LTD. 60,019 Quality Inspection and Audit DELOITTE TOUCHE TOHMATSU INDIA PRIVATE LIMITED 5,12,000 Professional fees towards consultancy, Tax returns and compliances DELOITTE HASKINS & SELLS 35,000 Professional fees towards issuing certificates Total 6,07,019 I.T.A. No. 7780/Del/2019 9 24. Further, the ld. AR has submitted that services in dispute are neither performed by the appellant for itself nor availed by the appellant from any other third party. However, no data has been provided by the TPO/CIT(A) which demonstrated that the captioned services in any way are duplicate in nature. 25. With regards to the fact stated by the CIT (A) in Para 9.13 (supra) of its order that the appellant has not challenged the contention that the payments for management services were duplicate in nature. In this regard, the ld. AR has argued that the appellant vide its submission dated 25.06.2018 before CIT(A) (refer PB Page No. 151-152) has mentioned that the captioned services are not duplicate services as the said services are neither performed by the appellant for itself nor availed by the appellant from any other third party. Therefore, the said statement in para No. 9.13 in order of CIT (Appeals) is factually incorrect and untenable. 26. The ld. AR has argued that TPO has erred in determining the ALP of management support services at Nil based on various alleged observations made by the TPO while passing order u/s 92CA of the Act, relevant extract of the same is reproduced below: “The taxpayer has not been able to show as to when and how the services under consideration were requisitioned from the AEs, whether the services were actually needed by it, whether the same were actually received it by producing contemporaneous documentary evidence, at the time of entering into agreement or at the time of availing the services (if actually availed) what benchmarking analysis has been done, what cost benefit analysis was done when a huge payment has been made by it to the AEs.” 27. The ld. AR has argued that the TPO has judged the commercial expediency of the services availed by the appellant from AE and therefore has surpassed its jurisdiction by concluding that there was no necessity of availing such services in the nature of IGS from the AE. I.T.A. No. 7780/Del/2019 10 Hon’ble SC in case of Pr CIT Vs Frigoglass India Pvt. Ltd. [2018-TII-03-SC- TP] which referred and relied upon the judgment of Hon’ble Jurisdictional High Court in case of EKL Appliances Ltd. [TS-206-HC-2012(DEL)-TP], wherein it was upheld that “It is not open to the TPO to question the judgment of the assessee as to how it should conduct its business and regarding the necessity or otherwise of incurring the expenditure in the interest of its business. It is entirely the choice of the assessee as to from whom it contemplates to source its technology or technical knowhow and as to what steps should be taken to meet the competition prevalent in the market and to stave off the competitors. This is the domain of the businessman and the TPO has no say in the matter” Therefore, in line with the observations relied upon by the Hon’ble SC, we are of the considered view that the necessity of entering into agreement entered by the appellant with its AE for provision of IGS and related terms and conditions are purely business matters and falls within the purview of appellant’s commercial wisdom which cannot in anyway be examined and challenged by the revenue authorities. The domain of revenue authorities in instant case is only to determine the ALP of the captioned transaction and not to judge the rationale and necessity of such service. Hence, the TPO neither has the jurisdiction to question the commercial expediency of a transaction nor to examine the necessity of transactions or to disregard the transaction evaluating the benefits derived therefrom. Having said that, we have expressly dealt with the issues concerning the benefits derived by the appellant and documentary evidences filed in support of the receipt of aforesaid services in the ensuing paragraphs. 28. The ld. AR has filed several email correspondences for the services received from AE along with agreement and invoices. It has been reiterated that these services are ongoing services and are in the nature of aligning the entire Metalsa group and setting standards which need to be adhered by all the associated entities of the group. These services are not high-end, technical or complex services requiring separate requisition and travel of employees of AE to India for providing the services. I.T.A. No. 7780/Del/2019 11 The CIT (A) has infact in a chart format shown the various e-mails in respect of each category of services provided by the AE to the appellant on page no. 59-64 of its order. As per the recent ruling of co-ordinate bench in case of Corning Technologies India Pvt Ltd [TS-427-ITAT- 2021(DEL)-TP], wherein one of us was a party, it has been held that where the assessee has provided evidences including the e-mails, invoices, agreements and has also provided details of cost allocation, it cannot be said that the services have not been provided to the assessee. Relevant extract of the said judgment is reproduced here below: “26. The entire grounds consists of two issues, whether in fact the services were rendered and availed by the assesse and if so, whether the mark-up of 5% can be considered as comparable with the market averages. Culling from the details filed and arguments of both the parties, we find that there is no dispute about availing of the services. The evidences include the e-mails, invoices, agreements submitted at page nos. 294 to 397 of the paper book. The assessee has also provided details of cost al location at page nos. 285 to 288 of the paper book. Hence, it cannot be said that the services have not been provided to the assessee. With regard to the mark-up of 5%paid by the assessee, we find that the economical analysis submitted by the assessee at page nos. 121 to 128 of the paper book is acceptable at the same time, the comparable namely, Pay Cheques. Inc. showing the OP/OC of 56.12% is being excluded owing to the extraordinary profits. Taking into consideration, the remaining comparables, we find that the arithmetic mean is more than the 5% mark-up charged from the company. Hence, we hold that no adjustment is called for while determining the ALP on account of payment for Intra Group Services.” Further, in case of Bombardier Transportation India Pvt. Ltd. [I.T.(T.P)A.No.1626/Bang/2015], the ITAT has given I.T.A. No. 7780/Del/2019 12 relief to the assessee (Bombardier) by stating that the services are specific in nature and the assessee has provided detailed e-mail correspondence, invoice etc. to authenticate the availing of services. 29. Thus, based on the various evidences filed by the appellant, it cannot be said that the services in the nature of management fees has not been provided to the appellant. Therefore, relying on the co-ordinate bench ruling in case of Corning Technologies India Pvt. Ltd (supra), we find such email correspondences, invoices, and agreements etc. as a tangible material that the appellant has received services from AE. 30. The ld. AR has based on the audited financials of the appellant, along with various factual matrix has depicted the increase in sale trend through tables and charts wherein the CAGR for Sales during Period FY 2012-2013 to FY 2017-2018 has been increased by 55.23% and the same was due to unique and specialized managerial support services provided by the AE. Also, it has been stated that, the same way there was Increase in the Sales Volume as well. In the present case, there is an increase in the revenue and customer base of the appellant on year on year basis as per the factual data presented before us, which is duly placed on record. The lower authorities should have considered this fact while dealing with this aspect of the issue. Anyhow, based on the above analysis it cannot be said that no benefit in the form of various management services received by the appellant from its AE. 31. We have also noted that AE has allocated the total cost incurred on aforesaid group services to recipient entities based on the budgeted sales of group entities including Metalsa India. It is important to consider that while making allocation for management fee, the AE has only charged the actual cost so allocated without any mark-up on such costs i.e., Rs. 69.66 Lakhs which is only 0.30% of total expenditure of Rs. 236.12 Crores incurred by the AE. The working of allocation has provided by the appellant is reproduced hereunder for reference. I.T.A. No. 7780/Del/2019 13 “Details of allocation of expenses incurred by AE in relation to management services: Name of Group compani es Budgete d sales (in USD '000) Budgeted sales (in INR) 1 USD = INR 45.30 Percen tage of budget ed sales Actua l expen diture incur red alloc ated in ratio of budge ted sales (in USD '000) Actual expendit ure incurred allocate d in ratio of budgete d sales (in INR) Metalsa SA de CV 8,51,03 1.48 38,55,17,2 6,096 48.47% 25,23 2.78 1,14,44,3 3,264 Metalsa Argentina SA 1,87,38 9.15 8,48,87,28 ,473 10.67% 5,556. 02 25,19,93, 470 Metalsa Structural Solutions, Venezuel a 2,42,40 7.79 10,98,10,7 2,922 13.81% 7,187. 30 32,59,80, 349 Metalsa Hopkinsv ille 1,23,30 5.05 5,58,57,18 ,595 7.02% 3,655. 95 16,58,15, 719 Metalsa 1,01,53 4,59,96,25 5.78% 3,010. 13,65,42, I.T.A. No. 7780/Del/2019 14 Owensbo ro Inc. 6.99 ,488 54 898 Metalsa Australia PTY Ltd 38,738. 49 1,75,48,53 ,522 2.21% 1,148. 58 5,20,93,9 77 Metalsa Roanoke Inc. 76,505. 93 3,46,57,18 ,712 4.36% 2,268. 37 10,28,82, 132 Metalsa India Pvt Ltd 5,180.2 6 23,46,65, 610 0.30% 153.5 9 69,66,20 2 MetalsaB rasilIndú stria e Comércio de Autopeça s 83,559. 86 3,78,52,61 ,518 4.76% 2,477. 52 11,23,67, 970 Metalsa Campo Largo 46,240. 91 2,09,47,13 ,283 2.63% 1,371. 03 6,21,82,9 37 Total 17,55,8 95.90 79,54,20, 84,218 100.00 % 52,06 1.69 2,36,12, 58,919 32. Further, the ld. AR has contended that the TPO has applied CUP method as most appropriate method for determination of ALP of the said services, without giving any cogent reasons and has determined the ALP of management support services received by the appellant at NIL, taking the view that no independent party would have made the payment in the uncontrolled circumstances. The ld. AR has submitted that the said action of TPO is arbitrary and is not line with Rule 10B(1)(a) of the Rules which lays down the need for I.T.A. No. 7780/Del/2019 15 ‘comparable uncontrolled transactions’ while applying the CUP method. 33. It is pertinent to mention here that there is no dispute on the legal proposition that if the TPO finds that the method applied by the appellant is not appropriate, it can carry out his own analysis however he has to follow the methodology as provided in Chapter-X of the Income-tax Act. 34. It may further be noted that the starting point for applying the CUP method as per the transfer pricing provisions is availability of the price of the same product or service in uncontrolled conditions and according to that the ALP of the product or service can be ascertained. Thus, the action of TPO of applying CUP method and at the same considering the value of such transaction as Nil in absence of comparable uncontrolled transactions, is in itself contradictory and without any basis/logic. Therefore, the contention of the TPO o apply CUP method as MAM is not tenable under the law. 35. Hence, based on above, we disapprove the action of CIT (A) treating the management services provided by the AE to the appellant as duplicate service and consequent determining its ALP at Nil. The appellant succeeds on other grounds raised before us. The transfer pricing adjustment made by the TPO and upheld by CIT(A) amounting to Rs. 69,65,962/- is hereby deleted.” 6. We observe from the order of the ld. CIT (Appeals) at page 41 of para 5.2.4 that it is the finding of the ld. CIT (Appeals) that the material facts of the assessee’s case for assessment year 2012-13 are the same in the year under reference i.e. 2013-14. The ld. CIT (Appeals) also observed that in accordance with the principle of consistency and applying the doctrine of judicial discipline he is respectfully following the order of the ld. CIT (Appeals)-44, New Delhi, for the assessment year 2012-13 dated 25.10.2018 and not I.T.A. No. 7780/Del/2019 16 accepted the contentions of the assessee. Therefore, we observe that the facts of the case of the assessee for the assessment year 2012-13 are similar and identical to the facts for assessment year 2013-14 and the Tribunal decided the issue in favour of the assessee for the assessment year 2012-13. Thus respectfully following the order of the Tribunal in assessee’s own case for the assessment year 2012-13 we reverse the order of the ld. CIT (Appeals) in confirming the transfer pricing adjustment made by the TPO. Accordingly the TP adjustment made amounting to Rs.2,60,41,252/- is hereby deleted. Ground No. 3 of the grounds of appeal is allowed. 7. Ground Nos. 1 and 2 are general grounds and they need no adjudication. 8. Ground No. 4 is in respect of initiating penalty proceedings under section 271(1)(c) of the Act for the alleged concealment of income and this ground is pre-mature at this stage and accordingly this ground is dismissed. 9. In the result the appeal of the assessee is partly allowed as indicated above. Order pronounced in the open court on : 31/10/2022. Sd/- Sd/- ( G. S. PANNU ) ( C. N. PRASAD ) PRESIDENT JUDICIAL MEMBER Dated : 31/10/2022. *MEHTA* I.T.A. No. 7780/Del/2019 17 Copy forwarded to :- 1. Appellant; 2. Respondent; 3. CIT 4. CIT (Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, New Delhi. Date of dictation 25.10.2022 Date on which the typed draft is placed before the dictating member 27.10.2022 Date on which the typed draft is placed before the other member 31.10.2022 Date on which the approved draft comes to the Sr. PS/ PS 31.10.2022 Date on which the fair order is placed before the dictating member for pronouncement 31.10.2022 Date on which the fair order comes back to the Sr. PS/ PS 31.10.2022 Date on which the final order is uploaded on the website of ITAT 31.10.2022 Date on which the file goes to the Bench Clerk 31.10.2022 Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the order